Q&A: How this Ex-Bank Trader Manages Correlations and Risk by Sam Eder

Earlier this week I (Sam) wrote a post on managing correlations in FX, a critical aspect of risk management. In the post I mentioned that Jim Langlands keeps his basket of tradable currencies quite limited. Jim is an ex-bank trader with 30+ years trading currencies and is a signal provider at FX Renew, and an analyst at FX Charts. We had a question about Jim’s strategy and I have posted it here along with his response.

Q Ash: Does Jim avoid correlations entirely or does he trade a diverse basket of say 8 pairs where he has tried to minimize correlation? eg only trading AUDUSD EURJPY CADCHF GBPNZD?

A. Jim: I tend to concentrate on a small basket of currencies that I am comfortable with. Over very many years I have found that if I have a portfolio of say 10-15 different positions at any one time, not necessarily correlated with each other, that if/when things go wrong, then it becomes very confusing as to which ones to cut/keep – and the losses can mount up quickly. Once your whole mindset is confused it takes a while to get it back – and the only way to do it is to cut all positions and take a deep breath and to start again. Not ideal.

By keeping to a relatively narrow set of currency pairs/crosses I can focus much better on what I am doing.

I tend to keep to one or at the most two different positions against any one currency.

I.e. If I am short EurUsd and AudUsd, it is unlikely that I will be short GBPUSD or NZDUSD as well, as there are lot of eggs in the same basket, if/when it goes wrong.

Similarly if I am long say EurAud or EurJpy I will be unlikely to have a long GbpAud or a GbpJpy position.

I tend to concentrate on having positions against the US$, the Eur or the Aud and to a lesser extent the Kiwi.

I tend to avoid the Chf and the Cad altogether.

The Yen is an animal with its own rules….A lot of the time I don’t get too involved, but occasionally it is worth having a decent sized position. Timing is everything here…..

I very rarely have more than 3 different crosses on at any one time but may have several positions at different levels (ie short EurUsd) against one currency as I try and build a longer term strategic position (as per the current order to sell Aud at several levels, looking to build a managed short position) with a view to the Aud heading for a longer term move to the downside.

The other important thing to note is that each individual position is relatively small, so that any adverse movement is not going to kill me. My portfolio gearing levels will never, ever be more than 5:1 of my total account balance and generally is more likely to be at closer to 3;1

My current positions can always be monitored on http://www.myfxbook.com/members/FXCharts/fxcharts/532322

Thanks to Jim for the time he took to reply to Ash. It’s very helpful indeed to get the insights from Jim’ experience.